TPG gets contrarian on distressed

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So in the private equity world everyone is bolstering up their distressed investing units EXCEPT TPG.

TPG Capital decided to reduce the size of its $6 billion distressed fund targeting financial institutions by 25%. TPG told investors it was scaling back its distressed financial fund because it was concerned the government's expanded role in the financial sector meant fewer opportunities for private sector firms. TPG says "we are competing with the government and their funding is cheaper"

Thoughts...

Comments (14)

 
Feb 9, 2009 - 4:35pm

The gov't isn't investing in distressed for a profit; it's doing it because it has to do it to continually prop up the economy, which is currently on life support. I'm sure that the gov't would love it if private sector firms came in and invested; the problem is that private companies, seeking a profit, will only enter at firesale prices to maximize their margins. The gov't needs to step in before assets reach these levels, because a crisis of confidence would cause a systematic collapse.

 
Feb 9, 2009 - 5:18pm

uru, you may be right on reason 1a as to why the government is investing in these FI's, but reason 1b is, without question, the potential to make a profit. With the new plan, they can grab these assets at next-to-nothing, hold them for five years (because it does not effect anything if they hold onto them), and when things turn around, dispose of them for a tidy profit.

The government is well aware of the fact that they stand to make a fair profit on these deals.

 
Feb 9, 2009 - 9:14pm

The gov't's reasoning (for public image purposes) is that these assets will appreciate in value and that they will be profitable in the future. Since it's using public money to fund these acquisitions, they can't let Joe Public think that he's just throwing away his tax money to give to some greedy banker. The reality of the situation, however, is that the gov't is paying a premium for these toxic assets, relative to what most private firms would be willing to pay. Yes, it's possible that the gov't will turn a profit in the future, but it's just as likely that these assets will depreciate and the gov't will run at a loss. Most firms right now won't touch these assets unless they're getting a price that would almost guarantee a risk-free profit.

 
Feb 9, 2009 - 9:56pm

uru:
The reality of the situation, however, is that the gov't is paying a premium for these toxic assets, relative to what most private firms would be willing to pay. Yes, it's possible that the gov't will turn a profit in the future, but it's just as likely that these assets will depreciate and the gov't will run at a loss.

Hmmm...spending entirely too much to get little to no return.

Definitely sounds like how the government runs things.

 
Feb 9, 2009 - 10:00pm

Uncle SAm WANTSto turn a profit, but they most likly will break close to even. THis si due to public pressure to sell and reduce our gigantic deficit as well as the faact that we payed a premium at the point where many of these companies had not yet bottomed out. Another is shown through history itself, the Resolution Trust Corporation, which we thought would turn a profit but we lost money when we lliquidated the thrifts we bought

So what do you do?
-I work for an investment banking firm.
Oh okay; you are like my brother, he works for Edward Jones.
-No, a college degree is required in my profession

Reality hits you hard, bro...
 
Feb 10, 2009 - 4:54pm

Default rates are skyrocketing and the financing possibilities for restructurings are getting pretty limited. The risk involved in distressed plays right now is probably the highest it has ever been. This may not matter for the govt, but TPG investors may feel differently about waiting who knows how long until recovery rates improve.

I suspect we'll see an increasing amount of Chapter 7s as opposed to Chapter 11s. That might not be particularly attractive for a shop who's specialty is not distressed.

 
Feb 11, 2009 - 6:44am

Juwanna Mann:
I'm sure this has absolutely nothing to do with WaMu. Absolutely nothing.

With respect to scaling back investments in the financial sector it just might. Burned once, why get burned again? Don't rule it out. So, if it has nothing to do with it, why so?

 
Feb 11, 2009 - 2:32pm
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